3 ways to transfer real estate to future generations paid Whittier Trust
Owning a special residence, vacation home or investment property can represent a pinnacle of achievement, but transferring that property to the next generation has tax and estate implications for you and your family.
“The bad side of this is that they’ll inherit the cost basis of the property, so if they were to sell it, there would presumably be a heavy capital gains tax,” he said. The parents can also hold on to the property until they pass away. The heirs then inherit the property with a stepped-up tax basis equal to the market value of the property at the time of the death, not the original purchase price.
“While the estate tax savings can be compelling, the parents need to be very comfortable with no longer owning their home and having to pay rent to the trust for their children,” said Renken. “So this needs to be thoughtfully analyzed not just for tax efficiency but also for the emotional impact in order for this vehicle to be effective.
For example, if a family compound in Palm Springs would otherwise go unused, it may be best to convert it to a rental property in order to exchange it in the future for an apartment building; doing this will defer the capital gain tax liability and maximize the income potential.
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